Betting on Keystone

If anyone needs evidence that government is broken, all they need is the Keystone XL Pipeline. When it comes to approving this project, it appears the federal bureaucracy is completely frozen.

It's not that complicated. TransCanada (TRP) wants to increase capacity of an existing pipeline, which already transports crude oil from Canada to various U.S. destinations. The plan is simple: supplement existing Keystone capacity by adding new lines.

If approved, the larger pipeline will increase capacity by more than 800,000 barrels of oil per day. This new capacity will reduce American dependence on oil from Venezuela and from the Organization of the Petroleum Exporting Countries (OPEC) by up to 40%.

Since 2008, TransCanada has been asking the White House to sign off on the project. Month after month, the project suffers agonizing delays as Washington insiders chew old cabbage.

The gridlock is not as much about policy as some would have us believe. The U.S. has an established environmental and energy policy, which encourages the exploitation of tight oil and tar sands. Today, U.S. companies produce millions of barrels of oil and billions of cubic feet of natural gas from fracked rock and sands.

While Congress established broad regulatory frameworks for clean air and clean water, managing environmental implementation plans has been left largely to individual states. For this reason, carbon, methane, greenhouse gases and water rights have become environmental issues in states like New York, Pennsylvania and California. The same issues do not seem to concern most North Dakota or Texas counties.

With a regulatory framework in place, it seems the question of the State Department approving the Keystone XL Pipeline has little to do with environmental impacts. It does have to do with environmental concerns in other people's countries. Specifically, U.S. policymakers seem to be imposing their values on Canada and the Canadian people.

It is an unbalanced argument. The U.S. depends on oil. It produces what it can and must import the balance. The nation's top three importers are Canada, Venezuela and Saudi Arabia. Over the last two decades, the combined amounts of oil imported from these three nations increased by more than 30%.

While imports have grown over time, individual contributions are a different story. For reasons of energy security, logistics, economics and regional priorities, the US has a 20-year policy of favoring Canadian oil over any other source. Year-over-year, the U.S. increased imports from Canada as they decrease imports from Venezuela and Saudi Arabia.

The graph clearly shows there is no new policy question about importing more oil from Canada and less oil from Venezuela and Saudi Arabia. That question was settled decades ago. It was ratified by every administration, including the current one.

But if the U.S. does not allow the Keystone XL Pipeline, the U.S. will be forced to import more from other nations, which might include their old suppliers Venezuela, Saudi Arabia and Nigeria.

While convenient, Venezuelan oil delivered to U.S. ports is not much cleaner than Canadian oil. Yet for some reason, Washington's environmental analysis of producing, transporting and consuming Venezuelan oil is not a concern. It does not seem to enter Washington's thought process that Canadian oil is essentially the same as Venezuelan oil with less geopolitical risks.

Further, oil shipped by pipeline is safer and cleaner than oil shipped by foreign trucks, barges and ships. Pipelines become U.S. assets, and provide U.S. jobs and U.S. tax base.

In building the Keystone XL Pipeline, TransCanada is not taking shortcuts. It seeks normal approvals from each state the pipeline touches and approvals from federal regulators. All of those approvals seem to be on a normal path.

The only technical challenge for TransCanada to consider is how to cross the hundreds of other pipelines already operating in the region. Enbridge (ENB), Enterprise Products Partners (EPD), Kinder Morgan (KMI) and a number of other pipeline companies already operate hundreds of oil and gas pipelines. Routinely, new pipelines are planned, adjusted, approved, built and managed. With these other systems, there is no drama.

If Washington wants to send a signal that it can get business done, it needs to decide about the Keystone pipeline. Any decision, including a no, is better than continuous handwringing and perpetual deferrals.

If investors want to speculate, place a bet on TransCanada. It is hard to see how Washington could possibly conclude anything other than the Keystone XL Pipeline is equitable and in the national interest. When the announcement to approve the pipeline is finally made, TRP may see a nice little jump.